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Tradesman News

Taxing Tradesmen

by Benedict Smith | Nov 22, 2018

How can trades​people protect themselves from the taxman?

For builders, electricians, plumbers and all other tradespeople, tax enquiry insurance is the most sensible option against an increasingly aggressive HMRC.

When the subject of the taxman comes up in the pub, it seems like a few people have had a run in with him. Especially the self-employed. We’ve all met that character at the bar who tells stories about outwitting HMRC, but many of us running our own businesses listen with a sense of unease, wondering whether we understand everything we should about tradesman tax laws.

But how much of this is a myth about HMRC and the self-employed, and how much is reality? As a self-employed tradesman, is the taxman out to get you? Or, are we all just inventing a bogeyman, because of this built in idea that we’re all up against the system? Is it true that honest, hard working tradesmen who slog away at it are increasingly being hassled by HMRC?

Well, the facts suggest sole traders - whether you’re a builder, plumber, electrician or any other tradesman - have every reason to protect themselves with tax enquiry insurance.

Is HMRC really targeting the average tradesman?

HMRC is pretty cagey about these things, but in 2014 a new trend in tax collection started. Reports then said the amount of tax collected from people who completed self-assessment tax returns rocketed by 39%, from 2013 to 2014.

Up to that point, the number of tax enquiries had risen gradually, but since, HMRC has been much more aggressive. The taxman has cast his net wider and targeted many sole traders, taking a “heavy handed" approach in order to catch an "average taxpayer".

information on tradesman tax enquiry insurance 

And now, in 2018, according to HMRC itself, 10% of all small businesses in the UK (including the self-employed) are under investigation - equivalent to more than half a million at any one time.

There’s not much comfort in these facts for a tradesman thinking HMRC has sympathy for one-man-bands that might not have a perfect grasp of their tax affairs. Forget it. The taxman seems to have zero tolerance.

What might cause a tax enquiry?

Every year, HMRC picks a number of cases to pursue. Once contacted, taxpayers are then asked to provide evidence to support the decisions they’ve made about the amount of tax paid. It’s usually a complicated, lengthy and stressful process.

But how does the taxman decide who to target? Again it’s hard to know how this works - HMRC won’t tell you. But tax experts believe certain formulas are used to help focus on specific trades, accounts and individuals.

For example, HMRC might look at your profit margin. Let’s say you’re a builder, and you make less than the average - the taxman might check to see if this stacks up. There are other figures that might look odd in the accounts too - no cash in hand in a cash trade, or low trade debtors in a business where you'd normally expect 60 or 90 days - this might suggest that sales have been suppressed at the year end. Other reasons include tip-offs to a tax hotline - angry employees and ex partners are regular callers apparently. So watch out...

Leaving out income from a tax return can also trigger a tax enquiry. Late returns another. HMRC seems to take the view that sole traders who aren’t organised enough to do their tax return on time are just as disorganised when it comes to declaring all their income. Those who don’t have an accountant are also more likely to be looked at, because, in the taxman’s eyes, they don’t know what they’re doing.

How can you safeguard your business?

There are plenty of reasons for tax enquiries. If it happens, you might not know why, and frankly it isn’t a pleasant experience. It can take over your life, for on average, a year or more. Sole traders will almost certainly need expert accountancy help, and professionals aren’t cheap. Around £5k in accountancy fees is the figure most often quoted, but it can be much higher for complex cases.

But what can you do? Taking out tax enquiry insurance is about the only option and the most rational thing to do. It won’t stop a tax enquiry happening, but the right tradesmen insurance policy will mean you won’t be outgunned by HMRC and will have a fighting chance. Tax insurance starts at around £120 a year and is available to cover accountancy fees and, when required, to pay for specialist help.

Tax enquiry insurance can provide up to £50k cover for professional representation in defence of a HMRC enquiry, and access to experts who specialise in self-employment tax. Sole traders, limited companies and partnerships can take out insurance policies which cover a wide range of tax enquiries.

As a very small proportion of the cost of professional representation and the tax you’ll be made to pay if you lose your case, tax enquiry insurance increasingly looks like a no-brainer. And who can put a price on the relief of knowing you have experts fighting your corner?

With the Government looking to earn more money from tax going forward, for many self employed tradespeople, tax enquiry insurance has moved from being a nice-to-have, to a must-have. And this goes for builders, painters and decorators, plasterers, gardeners, farmers and even driving instructors.

Rhino Trade Insurance offers tax enquiry insurance policies designed for self-employed tradesmen and small businesses.



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